There's no end of things currently dividing the nation, and now there's something new to add: fund lists – carefully curated selections of the ‘best’ funds on the market. Critics denounce them, but audiences love them.
This month two new lists joined the register. Investment platform Interactive Investor launched its Super 60 selection, and Hargreaves Lansdown presented its revamped and trimmed Wealth 50, triggering a fresh burst of gunfire, against the latter in particular. Several other lists exist and we publish two of our own – Top 100 Funds and Top 50 ETFs.
Attacks on the lists can be grouped into two types: justified fault-finding and ideological. The former would include allegations of lack of transparency on how funds are chosen (HL stands accused of only opening its list to funds that agree to discount their fees thereby allowing weaker funds through and deflecting attention from the platform’s own charges) and that the lists encourage investors to dismiss perfectly good funds that didn’t make the cut. But the lists’ biggest flaw, it seems, is that they include mostly active funds (although both ii and Hargreaves each include more than 10 passives on their list). This aspect is what gets critics’ goats. In the week that Jack Bogle, founder of Vanguard and champion of index tracking, died, it’s no surprise that passive advocates have shot down the idea that the lists are helpful.
Yes, passive funds are brilliant and should form part of every investor’s portfolio. Active funds are seen as an abomination that drain returns from investors. So why would anyone choose them?
For a start, some investors don’t like the idea that when the bear gains the upper hand, they will be following an index down rather than up. Then there’s the fact some active managers are so good that investors are willing to take the risk that they will fail to outperform the market. Investors are often led by conviction and they seek managers who hold similar views – they want funds that try to smash the market. They back managers they believe will add value because often they do.
This is at the core of it: stockpickers don’t want to be restricted to funds that promise average returns. They like the process of choosing individual shares, have enjoyed the rewards of doing so, and believe in the skills of managers such as Nick Train and Terry Smith.
We firmly believe in the usefulness of fund lists. They are, despite their flaws, based on rigorous analysis and make sense of a huge landscape for investors. Interactive's list, says Moira O'Neill, head of personal finance there, is designed to provide "a menu of high-quality choices across a variety of markets and investment types".
Lists encourage investors to be more analytical. Their focus on costs and risk is a reminder that performance isn’t the only thing to consider. They open investors' eyes to new sectors, and to bits of rubbish in their own portfolio.
But no matter how good a fund list is, all of the above flaws simply underline the number one rule: investors have to do their own research. Use them wisely – as a starting point not a finishing point.